Guidance on tax rules applying to the new Employee Shareholder status
Employee shareholder (ES) is a new employment status, available from 1 September 2013. HMRC has now published guidance to the tax rules.
Employee shareholders have different employment rights to employees.
In our news item last March, Whither employee shareholders?, we explained that employee shareholders are a new type of shareholder, who renounce employee rights in exchange for between £2,000 and £50,000 shares in their employer or a parent company. There is no requirement for businesses wishing to offer an employee shareholder contract to obtain HMRC approval or agreement.
The tax rules in brief are:
- gains on up to £50,000 of shares acquired by employee shareholders will be exempt from capital gains tax, and
- the first £2,000 of share value that employees receive under the new status will be free from income tax and NIC when they acquire the shares.
Before an individual agrees to be an employee shareholder they must receive advice from an independent adviser on the terms and effects of the employee shareholder agreement. The company is required to meet reasonable costs for that advice, whether the individual accepts the employee shareholder position or not, but this will not be treated as giving rise to a taxable benefit.
ERA S205A(1)(c) requires that a company using the ES status must provide prospective employee shareholders (before they become ESs) with a written statement of particulars of the status of employee shareholder and of the rights that attach to the ES shares.
The guidance explains in detail what this written statement must include.
Not too that ‘Relevant advice’ is defined in ITEPA S326B(2) as advice which is provided for the purposes of ERA S205A(6)(a) (ie, advice as to the terms and effect of ES agreement). Tax advice is specifically excluded from the exemption unless it consists only of an explanation of the tax effects of employee shareholder agreements generally.
For more information see the benefit exemption technical guidance.